Largest U.S. Bank Halts Foreclosures in All States

Bank of America, the nation’s largest bank, said Friday that it was extending its suspension of foreclosures to all 50 states.

The plan swept states with some of the highest foreclosure levels, including California, Nevada and Arizona, into a swelling crisis over lenders’ flawed paperwork that had been mostly confined to 23 other states that require judicial review of foreclosures.

Bank of America instituted a partial freeze last week in those 23 states, and three other major mortgage lenders have done the same. The bank’s decision on Friday increased pressure on other lenders to extend their moratoriums nationwide as well.

An immediate effect of the action will be a temporary stay of execution for hundreds of thousands of borrowers in default. The bank said it would be brief, a mere pause while it made sure its methods were in order.

But as the furor grows over lenders’ attempts to bypass legal rules in their haste to reclaim houses from delinquent owners, there is a growing expectation that foreclosures will dwindle for months as the foreclosure system is reworked.

Stan Humphries, an economist with the housing site Zillow.com, said what was initially cast as a problem of sloppy record-keeping is rapidly evolving into one that suggests the banks’ procedures for recording loans might not have followed the law.

“The former scenario represents a hiccup for the market, maybe a 30- to 90-day slowdown in foreclosure initiations,” Mr. Humphries said. “The latter scenario is more like hitting a wall.”

The uncertainty is putting the housing market in turmoil and causing vast confusion. Bank of America, for example, said it was not halting sales of foreclosed properties to new owners, but Fannie Mae, the giant mortgage holding company, is doing exactly that with properties it bought from Bank of America.

One real estate agent in Florida said Friday that he had six deals involving former Bank of America properties that had been at least temporarily scuttled. Representatives for Fannie, which was taken over by federal regulators after it failed two years ago, did not return calls.

Real estate agents said the extent of any disruption depended on how long the moratorium lasted, how many lenders ultimately participated — and what people in default decided to do.

“If it’s still January, February, March, and they’re not foreclosing, you’ll see a big effect,” said Jim Klinge, an agent in San Diego. “It’ll be a banker’s holiday, free rent for everybody and a lawyers’ gold mine.”

As soon as Bank of America announced its freeze in a terse press release, Senate Majority Leader Harry Reid and Edolphus Towns, the New York Democrat who leads the House Committee on Oversight and Government Reform, both pointedly asked other lenders to follow suit.

Increased pressure also came from Christopher J. Dodd, the chairman of the Senate Banking Committee, who announced a Nov. 16 hearing on foreclosures.

JPMorgan Chase, which has halted foreclosures in the 23 states where they need a judge’s permission, says it is putting hundreds of lawyers and executives to work addressing what it characterizes as a “technical” paperwork problem with 56,000 mortgages with improper documentation. Officials have no plans to halt foreclosures nationwide, and believe they can fix the problems within weeks, they said.

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“We'll go back and check our work one more time,” Brian Moynihan, the chief of Bank of America, said Friday in Washington.Credit
Brendan Hoffman/Bloomberg News

Chase officials acknowledge they had a flawed process, but they say they have not mistakenly foreclosed on any homeowners, because the underlying information is accurate. People close to the bank say that about one-third of the properties tied to mortgages under scrutiny are vacant, in line with their assessment of the overall industry.

The average borrower that Chase has foreclosed on, these people added, has not made a payment on the mortgage for about one and a half years — a figure that they say is also consistent with the industry.

Inside Citigroup, which has not suspended foreclosures, officials said they were breathing a sigh of relief. Sanjiv Das, the head of CitiMortgage, began a review of loan servicing processes about 18 months ago in anticipation of a groundswell of foreclosures.

At that time, Citi stepped up its employee training and tightened its documentation processes, giving officials there confidence that they have sidestepped the document issue. But given the huge number of mortgages it processed and its sprawling operations, Citi — which has faced one embarrassment after another — is not publicly declaring victory.

On Friday, Wells Fargo, another big lender that has not halted foreclosures, continued to maintain that its foreclosure processes were accurate and said it was not planning to initiate a nationwide moratorium.

“As a standard business practice, we continually review and reinforce our policies and procedures,” said Vickee Adams, a Wells Fargo spokeswoman. “If we find an error or if an improvement is needed, we take action.”

Bank of America’s chief executive, Brian T. Moynihan, speaking at the National Press Club in Washington, said he did not believe the bank’s action would disrupt the housing market.

“We haven’t found any problems with the foreclosure process and what we’re saying is that we’ll go back and check our work one more time,” he said.

Not only is Bank of America watched more closely as the nation’s largest bank, it also finds itself deeper in the subprime mortgage mess. It holds $102 billion in subprime loans on its balance sheet from the period when lending standards were most lax — 2005 to 2007 — more than JPMorgan Chase, Citigroup or Wells Fargo, according to a report by Christopher Kotowski, an analyst with Oppenheimer.

Bank of America’s troubled mortgage portfolio is a legacy of its June 2008 acquisition of Countrywide, a subprime specialist that was among the financial institutions with the most troubled loans, as well as its January 2009 merger with Merrill Lynch, which was a major player in the business of taking mortgages and transforming them into securities to be sold to investors.

In addition, as the beneficiary of two capital infusions by Washington under the federal bailout, Bank of America was among the banks most dependent on Washington to help survive the financial crisis, receiving $45 billion from taxpayers. Of that, $20 billion came in emergency aid after Merrill’s losses were revealed.

That money has been paid back, but several analysts said the company was eager to maintain good relations with the government, and emphasized that restoring the bank’s public image was a crucial factor in the action on Friday.

“What prompted Bank of America is they see the political writing on the wall, and this has clearly become a political issue,” said Guy D. Cecala, the editor of Inside Mortgage Finance. “Almost every lawmaker is calling for a national mortgage foreclosure moratorium, and given the momentum out there, they wanted to deal with it on their own terms.”

In fact, earlier this year, with a government ban on automatic overdraft fees for debit cards looming, Bank of America actually went further than its rivals and pre-emptively eliminated the overdraft option entirely. Other banks allow customers to now opt in to the program, which can result in huge charges for small overdrafts.

Another reason for Bank of America’s broader action, suggested Richard X. Bove, an analyst with Rochdale Securities, is that the attorney general of the state where it is based, North Carolina, has called on the bank to halt foreclosures there.

“It’s a pre-emptive strike,” he said. “The smartest thing to do is to get ahead of the attorneys general around the country on this.”

Correction: October 15, 2010

An article on Saturday about Bank of America’s decision to extend its suspension of foreclosures nationwide misstated the date of its merger with Merrill Lynch, a major player in the business of securitizing mortgages. The merger took place in July 2008, not January 2009.

Correction: October 16, 2010

An article last Saturday about Bank of America’s decision to extend its suspension of foreclosures nationwide misstated the date of its acquisition of a company specializing in subprime mortgages, and a correction in this space on Friday misidentified that company. Bank of America acquired Countrywide — not Merrill Lynch — and it did so in July 2008, not July 2009. (As the article correctly noted, Bank of America’s merger with Merrill Lynch was completed in January 2009.)

Eric Dash and Binyamin Appelbaum contributed reporting.

A version of this article appears in print on October 9, 2010, on page A1 of the New York edition with the headline: Top Bank Halts Its Foreclosures In All 50 States. Order Reprints|Today's Paper|Subscribe